Savills - Office Market Report - Barcelona - Spring 2009

� After sixty quarters of continued growth, the Spanisheconomy has officially fallen into recession,experiencing two consecutive quarters of negativegrowth. The situation of the Spanish economy is likelyto deteriorate in the next few quarters, and this willpossibly continue through to 2011.

� Despite the current economic situation, the lettingmarket has maintained relative stability, mainly due tothe completion of several owner-occupier purchasedeals and large turn-key transactions.

� The delivery of new projects has increased the city’soffice stock by 193,000 sqm, 80% of which has beenincorporated into the market as available stock, mainlywithin the Decentralised areas and the 22@ district.

� The 1.5 point rise in vacancy rate during the lastquarter has not directly impacted on any given region,however large differences can still be observedbetween sub areas.

� Until now, the decrease in rental values has beencontained, experiencing an average 4.5% q-o-qdecrease. The future fall in demand and the rise inoffice vacancy will put further downward pressure onrents.

� In 2008 the total volume of investment reached1,056 million euros, representing a 46% decrease withregards to 2007 figures. Lack of finance, negativegrowth forecasts for the Spanish economy and highseller expectations are preventing confidence growthand the completion of deals.

“A difficult start for 2009 is characterised by deteriorating marketfundamentals, with rising vacancy, weakening rental values andrising yields. The lack of attractive investment alternatives togetherwith the fall in the Euribor has nonetheless contributed to a numberof investment deals, which are based on quality assets, tenantstrength and long lease term contracts”.

Eusebi Carles - Director

Barcelona office market

Spring 2009

Take-up and vacancy rates Quarterly rental growth

Source: Savills Research Source: Savills Research

EconomySpanish economic situationThe Spanish economy has experienced a 1.0% fall thelast quarter of 2008 in terms of GDP. After twocontinuous quarters of negative growth Spain has nowtechnically entered a recession. According to severaleconomic reports, this economic contraction could lastup to six consecutive quarters, representing thelongest recession period since the return ofdemocracy.

Previous recessions in Spain

Source: INE

Several months of uncertain economic growthforecasts together with the economic difficultiesexacerbated by the international financial crisis and thedownturn in the building sector, have led theGovernment to re-adjust its economic forecasts.According to the 2008-2011 Spanish Stability Programapproved by the Spanish Cabinet, GDP growth hasbeen estimated at 1.2% for 2008, whilst in 2009 GDP itis expected to show a 1.6% decrease. Internal demandincreased by a mere 0.7% in 2008 and is expected toregister a 3.2% fall this year. This will be triggered by a9.3% decrease in investment levels, and a 1.5% fall inprivate consumption, a level, uncompensated by theexpected 2.1% increase in Government Administrationexpenditure.

Whilst the export sector experienced a GDP gain of0.6% last year, it is expected to show a 1.6 pointincrease this year. This increase however will notsuffice to salvage the current economic recession,although it will considerably reduce balance ofpayments deficit.

Unemployment levels in 2008 reached a year highsince 1987, with the number of unemployed reachingover 3 million, a figure which is expected to rise to 4million by the end of 2009. The building sector hasbeen amongst the worst affected, followed by theservices and industry sectors. The rise inunemployment will force the Government to intensifypublic expenditure which will affect the balance of the

treasury and will break for the first time the EuropeanStability Pact reaching 6% in 2009, an unprecedentedlevel since the early 90s. As a result of a fall in taxrevenue, led by sharp tax falls on the real estatesector, Government savings will be particularly affectedand experience a considerable decrease.

Most economic indicators which forecast the future ofthe economy are now showing negative results.However, in comparison to previous economicrecessions, the speed and volume of the deteriorationis now considerably higher.

On the other hand, inflation levels have levelled offand closed at 1.4% in 2008, representing a ten yearlow. This decrease represents the fifth consecutivedecrease in the interannual rate since its record-high inJuly (5.3%), when the value of the Brent crude oilbarrel reached $147. The fall in inflation has mainlybeen due to falling oil prices, and to a lesser extent, toa fall in other oil related products, such as transport.The value of the Brent crude oil barrel has decreasedsince August, reaching an average value of $43 inDecember, its lowest level since December 2004.

GDP growth and interest rates

Source: INE, European Comission

Faced with today’s economic situation, measures havebeen taken to counteract the crisis, which include ECBtax cuts, adopted to limit the impact of the recession.In January, the ECB announced the fourth consecutiveinterest rate cut, a fall from 4.25% to 2% betweenOctober 2008 and January 2009. This represents arecord low since the dot-com bubble burst. Furtherinterest rate cuts are expected in March and June ofthis year, which would likely leave interest rates at 1%.

The economy will likely benefit from strong inflationcontention and a fall in interest rates which will in turndeliver economic relief for families and companies.

Barcelona Office Market - Spring 2009 2

Recession Duration Quarters q-o-q change

1975 2 quartersQ1 1975 -0.2%Q2 1975 -0.1%

1978 1979 2 quartersQ4 1978 -0.1%Q1 1979 -0.5%

1992-1993 4 quarters

Q2 1992 -1.0%Q3 1992 0.0%Q4 1992 -0.4%Q1 1993 -1.1%

Now ?Q3 2008 -0.3%Q4 2008 -1.0%

Demand and Take-upDemand for office space in Barcelona hasmaintained relatively stable rates.

Gross office take-up rates reached 351,000 sqm in2008. Despite the current economic situation, this onlyrepresents an 11% fall compared to 2007 (394,000sqm), and a 27% fall compared to 2005, whenBarcelona reached a record office take-up (485,000sqm).These figures contrast with the significant fall intake-up rates in larger office markets, some of whichhave experienced up to a 50% fall in inter-annual take-up rates. The Barcelona market, given its wide rangeof sectors, has been relatively stable in comparison.

Take-up quarterly change

Source: Savills Research

In the second semester, take-up reached 160,000 sqm.These levels show a slight decrease from the firstsemester of the year, a yearly pattern not uncommon,given the usual reduction in take-up in the summermonths. It is worth noting, however, that the number ofdeals closed during the last quarter of the year fell byapproximately 26% compared to the average of thefirst two quarters, which shows a slowdown inunderlying take-up rates.

In terms of areas, the City Fringe constitutes 51% oftotal take-up, thus confirming the continued tendencyfor demand to shift to areas such as the 22@ district.Supply within this area is mainly comprised of modern,state of the art buildings, offering competitive rentalvalues and located in relative proximity to the CBD.Take-up in the Decentralised areas accounted for 23%.These areas attract demand driven by rental savings.

Rental deals represent almost 55% of total 2008 take-up, whilst owner-occupier purchases and turn-keyoperations have increased; representing 45% of thetake-up with only 18 deals throughout the year and anaverage area per deal of 8,800 sqm.

Today’s economy is experiencing a slow-down,following the end of economic growth in summer 2007.In this context, a number of companies present in theBarcelona market have chosen to consolidate their

activities into one building, thus keeping corporatecosts to a minimum.These shifts have mainly takenplace between the CBD and the 22@ district. CapGemini, who moved to 22@ from the prime section ofDiagonal Avenue, is a clear example of this shift. Afurther example includes Grifols, developer of plasmaderivatives. In the midst of the real estate downturn,Grifols acquired an office complex in Sant Cugat inorder to concentrate their corporate activities into onebuilding and retain vacant office space for the futureexpansion of the company.

Main relocations

Source: Savills Research

Whilst companies were not previously drawn to suchareas, these buildings are increasingly attractingattention, as they offer large surface areas atcompetitive prices, with modern specifications,providing an overall reduction in occupational costs.

These large deals (>3,000 sqm) accounted for 64% ofthe total take-up.

The demand for small areas continues to lead theBarcelona market, with 51% of the deals being forareas below 500 sqm. This demand is mainlyconcentrated in the CBD and the City Centre, wherevacancy rates are consistently low and mainly in mixeduse or obsolete buildings. The average surface areafor deals in the CBD has been 460 sqm.

Public entities represent the principal occupier ofspace, accounting for 20% of the total take-up. Entitiessuch as the Spanish Telecommunications Commission(CMT) and the Telecommunications and InformationTechnologies Centre (CTTI) have signed contracts forthe purchase of turn-key buildings destined for theirheadquarters, in the 22@ district and in the PlazaEuropa area, respectively.

Barcelona Office Market - Spring 2009 3

Company Origin Destination

CAP GEMINI Diagonal-Prime 22@

GRIFOLS Several locations Sant Cugat del Vallès

ISDIN Diagonal-Prime 22@

JOHNSON DIVERSEY Esplugues Cornellà

CTTI Pº Gracia-Prime Gran Via-Hospitalet

Supply and RentsSupply and vacancy rate

At the end of 2008, 407,400 sqm of office spacewas available, representing an 8% vacancy rate forCatalonia’s capital.

The 1.5 point rise in the vacancy rate compared to thefirst semester has had no direct impact on any oneparticular area, however large differences can still beobserved between sub-areas.

The CBD continues to experience undersupply, whichmay be slightly eased following the relocation of somelarge companies to other areas. Despite the hand overof several buildings in the area, Sant Cugat continuesto show a lower vacancy rate with regard toBarcelona’s average rate. An expected 90,000 sqm ofnew projects, however, will be delivered in the area in2009. Office submarkets in Baix Llobregat continue toshow signs of oversupply, with vacancy rates reachingover 20%. Cornellà, for example, saw the completionof buildings 6 and 7 of the WTC Almeda Park officecomplex at the beginning of 2008. This increased itsvacancy rate from 12% to 27%. We anticipate howeverthat this vacancy could be reduced with competitivepricing, given the quality and accessibility of thebuildings.

Vacancy rate by sub areas

Source: Savills Research

Delays in completion will affect many projects.

The strong office market of recent years had triggeredfrenzied development activity, in particular areas suchas 22@ district. Given the current uncertainty, severaldevelopers are opting to delay initiation of projects andawait an improvement in the lending markets, and /orthe possible sale of the project.

A total of 333,000 sqm of office space is expected tobe delivered until the end of 2009, 75% will bespeculative, 23% will be owner occupier and a low 2%will represent pre-leased areas. Three of the towers inthe new Plaza Europa ‘New Business Area’ (Realia,Zenit and Inbisa) will be delivered this year. Theseaccount for 27% of total development expected in

2009. Sant Cugat will represent 40% of newdevelopments, 42% of which will be owner occupied.The 22@ district will see the incorporation of 70,000sqm of new office space, 70% speculative. Themajority of new developments will be located in theCity Fringe and in the Decentralised areas. In the nextfew months, these areas will see a rise in vacancyrates and rents will suffer further pressure.

Rents

In general terms, rents in Barcelona experienced asmall decrease in the last quarter of the year. Thecurrent economic situation has increased caution. This,in conjunction with increasing supply, is leading todownward pressure on rents. The extent variesaccording to the different sub-areas.

The 22@ district has been the most affected in termsof rental values with a quarterly fall of 9%. This may bedue to buildings, initially entering the market atrelatively high prices for the area, decreasing theirrental value due to the economic climate, a necessarymeasure in order to increase the building’scompetitiveness in order to attract demand.

The CBD experienced a significant increase in rentssince the mid of 2006, however it has now alsoreadjusted its rents, lowering them by 5.6% withregards to the third quarter. This has situated primerents at 25.50 €/sqm/month, a strong contrast to the32.00€/sqm/month asking price in the area at thebeginning of the year.

Due to competitive rents and good quality stock, rentsin Sant Cugat have not yet been overtly affected bythis price correction and have maintained levels similarto those of the previous quarter.

Prime rental values by sub areas

Source: Savills Research

In the current climate, tenants hold greater negotiatingpower, and landlords are being forced to offer moreincentives to attract demand. These incentives will bemost attractive for tenants who can offer solidguarantees and accept lease terms.

Barcelona Office Market - Spring 2009 4

The investment marketThe total volume of investment for 2008 reached1,056 million euros in 36 transactions, representinga 46% decrease with regard to the record high2007 end of year figures, led by a particularlystrong first semester, prior to the US sub primecrisis.

Investment volume was 486 million euros during thesecond semester of the year, representing a 30.3%decrease compared with the same period in 2007.These results reflect the deterioration of the investmentmarket, as a result of increasing lack of availablefinance, the negative economic forecasts for theSpanish economy and the increasing marketuncertainty.

Investment volume

Source: Savills Research

On the more positive side the central banks’ downwardcorrection in interest rates following the bankruptcy ofLehman Brothers has reduced the cost of finance. Thisin conjunction with the sharp increase in yields hasincreased the spreads for investors. Notwithstanding,the overall scarcity of finance and increased spreadsfrom lending institutions for investments with higherrisk profiles, remain the key problems. Banks areattempting to reduce risk which has led to a fall in thenumber of players in the investment markets. Thosewith high levels of liquidity and reduced debt, fairingbest.

In this economic scenario, opportunity funds, someinternational core and core plus funds and familyoffices are once again active in the market and areinvolved in the principal deals currently taking place.National funds, remain generally inactive. Spanish fundSantander Banif Inmobiliario recently announced that itwas putting a two year hold on redemptions and iscurrently looking to sell assets rather than buy.

The Catalan Government has become a leader inproperty acquisitions and has been involved in thepurchase of various buildings it occupies. This reflectsthe current Local Government’s call to reduce rentalexposure and purchase certain properties, which

previously occupied as tenant.

Investors have become rigorously selective buyers,with a focus on assets which guarantee long termincome and long lease terms. Sale and leasebackoperations are leading the market, pushed by the needto obtain higher liquidity from owner occupiers and dueto the guarantees which long term lease contracts offerinvestors. Notwithstanding, each sale & leaseback dealis different and owner solvency, their business plan,bank guarantees, agreed rental levels and reviews,repurchase agreements and other contractualconditions should be carefully observed as they caninevitably affect the final value of the property.

Recent sale and lease back deals include the 20million euro sale of Barclays Bank main branch atPasseig de Gràcia 45 to the Vila-Casas Foundation,and the Plaça Catalunya 5 sale, part of the BBVAportfolio, to the German fund Deka for 82.5 millioneuros.

Euribor rate - prime office yield gap

Source: Banco de España, Savills Research

The general downward correction in capital values hasaffected, to a lesser extent, assets which offer buyerspeace of mind, through long leases to solid covenants.

Yields continue to rise, prime yields reaching 6.0%-6.25% , with an inter-annual correction of 125 basispoints (a 200 point increase since summer 2007).Secondary locations have been the more affected bythis rise, with a 225 basis point increase as comparedto the levels experienced before the sub-prime crisis.

Barcelona Office Market - Spring 2009 5

Barcelona office market

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Eusebi CarlesInvestment+34 93 272 [email protected]

Frédéric StravrakyOffice Agency+34 93 272 [email protected]

For further information please contact:

Muna BenthamiResearch Barcelona+34 93 272 [email protected]

Eri MitsostergiouResearch Europe+30 210 [email protected]

Barcelona office market map